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Best of Howard Stutz

Gaming Guru

Howard Stutz
 

With few exceptions, gaming stocks sliding

2 June 2008

LAS VEGAS, Nevada -- Wall Street investors do not expect a turnaround in the Las Vegas gaming market anytime soon. They also aren't impressed by the figures coming out of Macau.

The beneficiaries of this attitude appear to be regional casino operators. While the average daily stock prices of the major casino companies tumbled during May, the values of Las Vegas-based Ameristar Casinos and Pinnacle Entertainment both recorded slight turnarounds.

Still, an index charting 10 publicly traded gaming companies compiled by Las Vegas financial adviser Applied Analysis fell for the third consecutive month, hitting 486.28 at the end of May, a drop of 12.91 points. "The overall economic climate remains soft, consumer confidence levels fell, gas prices continued to climb and concerns about demand for the sector persisted," Applied Analysis partner Brian Gordon said in the report.

Neither Pinnacle nor Ameristar operates casinos in Las Vegas. The average daily share price of Pinnacle jumped 5.75 percent during May while Ameristar shares climbed 2.67 percent. Both companies' stock prices are trading about 50 percent below what they were a year ago.

"Investors might be finding some value in those companies," Gordon said.

Gaming analysts have said customers tend to remain close to home when the economy softens. That trend could help Pinnacle and Ameristar attract local clientele. Pinnacle recently opened a $475 million casino in downtown St. Louis, while Ameristar has upgraded its competing resort in neighboring St. Charles, Mo.

"It cuts the other way, also," Gordon said. "The market becomes more constrained because the casinos are not drawing from as large an area." Further evidence on the state of the economy arrived Friday. The Reuters/University of Michigan survey of consumer sentiment dropped for a fourth straight month in May, hitting a 28-year low of 59.8, down from a reading of 62.6 in April. The May level was the lowest since June 1980, when Jimmy Carter was in the White House.

Those factors have caused the average daily stock prices of the large gaming companies to struggle. Most have shown double-digit percent declines from a year ago.

The average daily share price of MGM Mirage (down 7.01 percent), Las Vegas Sands Corp. (down 4.04 percent), and Wynn Resorts Ltd. (down 1.67 percent) were sent lower in May by the companies' first-quarter earnings results, which were released during the month. The three operators are the leading American casino companies in Macau, where reports surfaced that the May gaming revenues might not be as robust as in previous years.

In a note to investors last week, Deutsche Bank gaming analyst Bill Lerner said May's Macau figures are likely to represent a 30 percent to 35 percent increase over May 2006, when gaming revenues climbed more than 57 percent. Outside factors may have impacted visitation.

"The earthquakes in China and general Hong Kong stock market weakness could represent an opportunity lost during May," Lerner said.

Also, the Chinese media reported this week that the government will restrict some access to Macau. Residents from the mainland China province of Guangdong will be allowed to apply for Macau travel visas just once a month, down from twice per month. Business and multientry visa travel will also be reduced to three to five visits per month, down from 10 per month.

A year ago, China imposed similar restrictions that hurt Macau visitation for about a month.

"There is no detail as to why the government is applying these limits," Lerner said. "This may be politically motivated and may be positioned as an attempt to curb problem gambling in the VIP business. It is less of a mass market concern, as those customers typically don't visit multiple times per month."

Two of the three slot machine manufacturers charted by Applied Analysis gained in value during May. The average daily share price of WMS Industries rose 1.48 percent, but Bally Technologies saw a 14.03 percent increase. During May, Bally said its earnings more than tripled during the third quarter while revenues climbed almost 33 percent.